<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- ----- THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 1-14328
TRAVELERS PROPERTY CASUALTY CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1445591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE TOWER SQUARE, HARTFORD, CONNECTICUT 06183
(Address of principal executive offices) (Zip Code)
(860) 277-0111
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK AS OF THE LATEST PRACTICABLE DATE:
COMMON STOCK OUTSTANDING AS OF JULY 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
CLASS A 62,834,121
CLASS B 328,020,170
</TABLE>
<PAGE> 2
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
Part I - Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements: Page No.
--------
<S> <C>
Condensed Consolidated Statement of Income (Unaudited) -
Three and Six Months Ended June 30, 1999 and 1998 3
Condensed Consolidated Balance Sheet - June 30, 1999 (Unaudited)
and December 31, 1998 4
Condensed Consolidated Statement of Changes in
Stockholders' Equity (Unaudited) -
Six Months Ended June 30, 1999 5
Condensed Consolidated Statement of Cash Flows (Unaudited) -
Six Months Ended June 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
</TABLE>
Part II - Other Information
<TABLE>
<S> <C>
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 28
Exhibit Index 29
Signatures 30
</TABLE>
2
<PAGE> 3
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited)
(in millions, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums $ 2,006 $ 1,903 $ 3,971 $ 3,801
Net investment income 510 520 1,013 1,028
Fee income 67 77 134 159
Realized investment gains 31 10 47 76
Other revenues 20 22 42 62
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues 2,634 2,532 5,207 5,126
- ----------------------------------------------------------------------------------------------------------------------------
CLAIMS AND EXPENSES
Claims and claim adjustment expenses 1,501 1,444 2,960 2,885
Amortization of deferred acquisition costs 310 304 625 590
Interest expense 40 40 80 81
General and administrative expenses 303 318 611 658
- ----------------------------------------------------------------------------------------------------------------------------
Total claims and expenses 2,154 2,106 4,276 4,214
- ----------------------------------------------------------------------------------------------------------------------------
Income before federal income taxes and cumulative effect
of changes in accounting principles 480 426 931 912
Federal income taxes 126 113 243 252
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES 354 313 688 660
Cumulative effect of change in accounting for insurance-related
assessments, net of tax -- -- (160) --
Cumulative effect of change in accounting for insurance and
reinsurance contracts that do not transfer insurance risk,
net of tax -- -- 27 --
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 354 $ 313 $ 555 $ 660
============================================================================================================================
BASIC EARNINGS PER SHARE
Income before cumulative effect of changes in
accounting principles $ 0.91 $ 0.80 $ 1.76 $ 1.68
Cumulative effect of changes in accounting principles -- -- (0.34) --
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 0.91 $ 0.80 $ 1.42 $ 1.68
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding 389.2 392.4 389.4 392.3
- ----------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income before cumulative effect of changes in
accounting principles $ 0.91 $ 0.80 $ 1.76 $ 1.68
Cumulative effect of changes in accounting principles -- -- (0.34) --
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 0.91 $ 0.80 $ 1.42 $ 1.68
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding
and common stock equivalents 390.3 392.9 390.5 392.8
============================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in millions, except shares)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Fixed maturities, available for sale at fair value (cost, $26,407 and $26,580) $ 26,672 $ 27,977
Equity securities, at fair value (cost, $1,088 and $796) 1,117 828
Mortgage loans 553 574
Real estate held for sale 86 83
Short-term securities 1,749 1,597
Other investments 1,030 827
- ------------------------------------------------------------------------------------------------------------------------
Total investments 31,207 31,886
- ------------------------------------------------------------------------------------------------------------------------
Cash 41 62
Investment income accrued 396 409
Premium balances receivable 2,908 2,901
Reinsurance recoverables 9,311 9,153
Deferred acquisition costs 531 518
Deferred federal income taxes 1,543 1,109
Contractholder receivables 2,051 2,019
Goodwill 1,436 1,457
Other assets 2,148 1,760
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 51,572 $ 51,274
========================================================================================================================
LIABILITIES
Claims and claim adjustment expense reserves $ 29,384 $ 29,589
Unearned premium reserves 4,292 4,166
Contractholder payables 2,051 2,019
Long-term debt 1,250 1,250
Other liabilities 4,882 4,225
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 41,859 41,249
- ------------------------------------------------------------------------------------------------------------------------
TAP - obligated mandatorily redeemable securities of subsidiary trusts
holding solely junior subordinated debt securities of TAP 900 900
- ------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock:
Class A, $.01 par value, 700 million shares authorized;
72,393,407 shares issued 1 1
Class B, $.01 par value, 700 million shares authorized;
328,020,170 shares issued and outstanding 3 3
Additional paid-in capital 5,479 5,479
Retained earnings 3,509 3,052
Accumulated other changes in equity from nonowner sources 185 921
Treasury stock, at cost (shares, 9,466,970 and 8,544,687) (330) (298)
Unearned compensation (34) (33)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 8,813 9,125
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 51,572 $ 51,274
========================================================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(in millions, except shares)
For the Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
DOLLARS SHARES
------- -------------------------
COMMON STOCK AND ADDITIONAL
PAID-IN CAPITAL CLASS A CLASS B
------- -------
<S> <C> <C> <C>
Balance, beginning and end of period $ 5,483 72,393,407 328,020,170
- ---------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of period 3,052
Net income 555
Dividends (98)
- ----------------------------------------------------------------------------
Balance, end of period 3,509
- ---------------------------------------------------------------------------
ACCUMULATED OTHER CHANGES IN EQUITY
FROM NONOWNER SOURCES, NET OF TAX
Balance, beginning of period 921
Net unrealized loss on securities (737)
Foreign currency translation adjustments 1
- ---------------------------------------------------------------------------
Balance, end of period 185
- ---------------------------------------------------------------------------
TREASURY STOCK (AT COST)
Balance, beginning of period (298) (8,544,687) -
Net Capital Accumulation Plan grants 17 566,717 -
Treasury stock acquired (49) (1,489,000) -
- --------------------------------------------------------------------------- -------------------------------
Balance, end of period (330) (9,466,970) -
- --------------------------------------------------------------------------- -------------------------------
UNEARNED COMPENSATION
Balance, beginning of period (33)
Net issuance of restricted stock under
Capital Accumulation Plan (12)
Restricted stock amortization 11
Balance, end of period (34)
- --------------------------------------------------------------------------- -------------------------------
Total stockholders' equity and shares outstanding $ 8,813 62,926,437 328,020,170
=========================================================================== ===============================
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(in millions)
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 183 $ 394
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investments
Fixed maturities 895 826
Mortgage loans 47 101
Proceeds from sales of investments
Fixed maturities 4,608 4,587
Equity securities 377 269
Real estate held for sale 5 33
Purchase of investments
Fixed maturities (5,252) (5,780)
Equity securities (478) (138)
Mortgage loans (6) (13)
Short-term securities, net (155) (476)
Other investments, net (312) (188)
Securities transactions in course of settlement 214 614
- ----------------------------------------------------------------------------------------
Net cash used in investing activities (57) (165)
- ----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of commercial paper, net -- (108)
Purchase of treasury stock (49) --
Dividend to TIGI (82) (66)
Dividend to minority shareholders (16) (13)
- ----------------------------------------------------------------------------------------
Net cash used in financing activities (147) (187)
- ----------------------------------------------------------------------------------------
Net increase (decrease) in cash (21) 42
Cash at beginning of period 62 47
- ----------------------------------------------------------------------------------------
Cash at end of period $ 41 $ 89
========================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Income taxes paid $ 218 $ 181
Interest paid $ 80 $ 81
========================================================================================
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. General
The interim condensed consolidated financial statements include the
accounts of Travelers Property Casualty Corp. (TAP) (a direct
majority-owned subsidiary of The Travelers Insurance Group Inc. (TIGI) and
an indirect majority-owned subsidiary of Citigroup Inc. (Citigroup) (see
note 8)) and its subsidiaries (collectively, the Company), are prepared in
conformity with generally accepted accounting principles (GAAP) and are
unaudited. In the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation have been
reflected. The accompanying condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements
and related notes included in the Company's Annual Report to Stockholders
for the year ended December 31, 1998. Certain financial information that is
normally included in annual financial statements prepared in accordance
with GAAP, but that is not required for interim reporting purposes, has
been condensed or omitted.
2. Changes in Accounting Principles and Accounting Standards not yet Adopted
Effective January 1, 1999, the Company adopted the Accounting Standards
Executive Committee of the American Institute of Certified Public
Accountants' (AcSEC) Statement of Position 98-7, "Deposit Accounting:
Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk" (SOP 98-7). SOP 98-7 provides guidance on how to account
for insurance and reinsurance contracts that do not transfer insurance risk
and applies to all entities and all such contracts, except for
long-duration life and health insurance contracts. The method used to
account for such contracts is referred to as deposit accounting. This SOP
does not address when deposit accounting should be applied. SOP 98-7
identifies several methods of deposit accounting for insurance and
reinsurance contracts that do not transfer insurance risk and provides
guidance on the application of each method. The effect of initially
adopting SOP 98-7 is to be reported as a cumulative catch-up adjustment.
Restatement of previously issued financial statements is not permitted. As
a result of adopting SOP 98-7, the Company recorded a benefit of $27
million after tax, reflected as a cumulative catch-up adjustment. Aside
from the initial impact at adoption, this SOP is not expected to have a
significant impact on results of operations, financial condition or
liquidity.
Effective January 1, 1999, the Company adopted the AcSEC Statement of
Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty-fund
and other insurance-related assessments, how to measure that liability, and
when an asset may be recognized for the recovery of such assessments
through premium tax offsets or policy surcharges. The effect of the initial
adoption of this SOP is to be reported as a cumulative catch-up adjustment.
Restatement of previously issued financial statements is not permitted. As
a result of adopting SOP 97-3, the Company recorded a charge of $160
million after tax, reflected as a cumulative catch-up adjustment. Aside
from the initial impact at adoption, this SOP is not expected to have a
significant impact on results of operations, financial condition or
liquidity. In July 1999, the funding basis for one of the various state
funds to which the Company is subject to assessment was changed from the
loss-based assessment to a premium surcharge. This change is expected to
significantly reduce the Company's liability for loss-based assessments
which was recorded as part of the cumulative catch-up adjustment in the
first quarter of 1999. The Company has not yet determined the impact of
this change but expects to report the impact in the third quarter of 1999.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (FAS 133). This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging
7
<PAGE> 8
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
2. Changes in Accounting Principles and Accounting Standards not yet Adopted,
Continued
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the consolidated balance sheet and measure those
instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a
forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment,
an available-for-sale security, or a foreign-currency-denominated
forecasted transaction. The accounting for changes in the fair value of a
derivative (that is, gains and losses) depends on the intended use of the
derivative and the resulting designation. Upon initial application of FAS
133, hedging relationships must be designated anew and documented pursuant
to the provisions of this statement. FAS 133 was to be effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. However, in
June 1999 the FASB issued Statement of Financial Standards No. 137
"Deferral of the Effective Date of FASB Statement No. 133" (FAS 137) which
allows entities which have not adopted FAS 133 to defer its effective date
to all fiscal quarters of all fiscal years beginning after June 15, 2000.
The Company expects to adopt the deferral provisions of FAS 137 and has not
yet determined the impact that FAS 133 will have on its consolidated
financial statements.
3. Segment Information
<TABLE>
<CAPTION>
TOTAL
COMMERCIAL PERSONAL REPORTABLE
(at and for the three months ended June 30, in millions) LINES LINES SEGMENTS
----- ----- --------
<S> <C> <C> <C>
1999
Revenues
Premiums $ 1,101 $ 905 $ 2,006
Net investment income 410 99 509
Fee income 67 - 67
Realized investment gains (losses) 34 (3) 31
Other 6 15 21
----------------------------------------------------------------------------------------------------------------------
Total revenues $ 1,618 $ 1,016 $ 2,634
======================================================================================================================
Operating income (1) $ 257 $ 103 $ 360
Assets 43,710 7,555 51,265
----------------------------------------------------------------------------------------------------------------------
1998
Revenues
Premiums $ 1,101 $ 802 $ 1,903
Net investment income 424 95 519
Fee income 77 - 77
Realized investment gains 10 - 10
Other 8 13 21
----------------------------------------------------------------------------------------------------------------------
Total revenues $ 1,620 $ 910 $ 2,530
======================================================================================================================
Operating income (1) $ 228 $ 107 $ 335
Assets 44,205 7,285 51,490
======================================================================================================================
</TABLE>
(1) Operating income excludes realized investment gains (losses) and is
reflected net of tax.
8
<PAGE> 9
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
3. Segment Information, Continued
<TABLE>
<CAPTION>
TOTAL
COMMERCIAL PERSONAL REPORTABLE
(at and for the six months ended June 30, in millions) LINES LINES SEGMENTS
----- ----- --------
<S> <C> <C> <C>
1999
Revenues
Premiums $ 2,174 $ 1,797 $ 3,971
Net investment income 823 189 1,012
Fee income 134 - 134
Realized investment gains (losses) 52 (5) 47
Other 14 29 43
----------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,197 $ 2,010 $ 5,207
======================================================================================================================
Operating income (1) $ 502 $ 212 $ 714
Assets 43,710 7,555 51,265
----------------------------------------------------------------------------------------------------------------------
1998
Revenues
Premiums $ 2,228 $ 1,573 $ 3,801
Net investment income 837 190 1,027
Fee income 159 - 159
Realized investment gains 64 12 76
Other 29 28 57
----------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,317 $ 1,803 $ 5,120
======================================================================================================================
Operating income (1) $ 453 $ 215 $ 668
Assets 44,205 7,285 51,490
======================================================================================================================
</TABLE>
(1) Operating income excludes realized investment gains (losses) and the
cumulative effect of changes in accounting principles, and is reflected net of
tax.
BUSINESS SEGMENT RECONCILIATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(in millions) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCOME RECONCILIATION, NET OF TAX
Total operating income for reportable segments $ 360 $ 335 $ 714 $ 668
Other operating loss (1) (27) (29) (57) (58)
Realized investment gains 21 7 31 50
Cumulative effect of changes in accounting for:
Insurance-related assessments - - (160) -
Insurance and reinsurance contracts that do not transfer
insurance risk - - 27 -
---------------------------------------------------------------------------------------------------------------------
Total consolidated net income $ 354 $ 313 $ 555 $ 660
======================================================================================================================
</TABLE>
(1) The primary component of the other operating loss is after-tax interest
expense of $26 million for the three months ended June 30, 1999 and 1998,
and $52 million and $53 million for the six months ended June 30, 1999 and
1998, respectively.
9
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TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
4. Changes in Equity from Nonowner Sources
The Company's total changes in equity from nonowner sources are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(in millions) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 354 $313 $ 555 $660
Net unrealized loss on securities (502) 73 (737) 51
Foreign currency translation adjustments (1) 1 1 (1)
----------------------------------------------------------------------------------------------------------------
Total changes in equity from nonowner sources $(149) $387 $(181) $710
================================================================================================================
</TABLE>
5. Earnings per Share (EPS)
Basic EPS is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the effect of potentially dilutive securities,
principally the incremental shares assumed issued under the Company's
Capital Accumulation Plan and other restricted stock plans. For the three
and six months ended June 30, 1999 and 1998, there was no significant
effect on EPS from dilutive securities issued.
6. Capital and Debt
TAP has a five-year revolving credit facility in the amount of $250 million
with a syndicate of banks (the Credit Facility). Under the Credit Facility,
which expires in December 2001, TAP is required to maintain a certain level
of consolidated stockholders' equity (as defined in the agreement). At June
30, 1999, this requirement was exceeded by approximately $4.5 billion. In
addition, the Credit Facility places restrictions on the amount of
consolidated debt TAP can incur. At June 30, 1999, there were no borrowings
outstanding under the Credit Facility. If TAP had borrowings under the
Credit Facility, the interest rate would be based upon LIBOR plus a
negotiated margin. TAP compensates the banks for the Credit Facility
through commitment fees. TAP also issues commercial paper directly to
investors and maintains unused credit availability under the Credit
Facility at least equal to the amount of commercial paper outstanding. At
June 30, 1999, TAP had no commercial paper outstanding. TAP also currently
has available a $200 million line of credit for working capital and other
general corporate purposes from a subsidiary of Citigroup. The lender has
no obligation to make any loan to TAP under this line of credit.
TAP's insurance subsidiaries are subject to various regulatory restrictions
that limit the maximum amount of dividends available to be paid to their
parent without prior approval of insurance regulatory authorities. Dividend
payments to TAP from its insurance subsidiaries are limited to $1.0 billion
in 1999 without prior approval of the Connecticut Insurance Department. TAP
received $300 million of dividends from its insurance subsidiaries during
the first six months of 1999.
10
<PAGE> 11
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
7. Commitments and Contingencies
In 1996, Lloyd's of London (Lloyd's) restructured its operations with
respect to claims for years prior to 1993. The outcome of the restructuring
of Lloyd's remains uncertain and the impact, if any, on collectibility of
amounts recoverable by the Company from Lloyd's cannot be quantified at
this time. The Company believes that it is possible that an unfavorable
impact on collectibility could have a material adverse effect on the
Company's results of operations in a future period. However, the Company
believes that it is not likely that the outcome could have a material
adverse effect on the Company's financial condition or liquidity. The
Company carries an allowance for uncollectible reinsurance which is not
allocated to any specific proceedings or disputes, whether for financial
impairments or coverage defenses. Including this allowance, the Company
believes that the net receivable from reinsurance contracts is properly
stated.
It is difficult to estimate the reserves for environmental and
asbestos-related claims due to the vagaries of court coverage decisions,
plaintiffs' expanded theories of liability, the risks inherent in major
litigation and other uncertainties. Conventional actuarial techniques are
not used to estimate such reserves.
The reserves carried for environmental and asbestos claims at June 30, 1999
are the Company's best estimate of ultimate claims and claim adjustment
expenses based upon known facts and current law. However, the conditions
surrounding the final resolution of these claims continue to change.
Currently, it is not possible to predict changes in the legal and
legislative environment and their impact on the future development of
asbestos and environmental claims. Such development will be affected by
future court decisions and interpretations as well as changes in
legislation applicable to such claims. Because of these future unknowns,
additional liabilities may arise for amounts in excess of the current
reserves. These additional amounts, or a range of these additional amounts,
cannot now be reasonably estimated, and could result in a liability
exceeding reserves by an amount that would be material to the Company's
operating results in a future period. However, the Company believes that it
is not likely that these claims will have a material adverse effect on the
Company's financial condition or liquidity.
In the ordinary course of business, the Company is a defendant or
codefendant in various litigation matters other than those described above.
Although there can be no assurances, the Company believes, based on
information currently available, that the ultimate resolution of these
legal proceedings would not be likely to have a material adverse effect on
its results of operations, financial condition or liquidity.
11
<PAGE> 12
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited), Continued
8. Bank Holding Company Act of 1956 Restrictions
Citigroup is a bank holding company subject to the provisions of the Bank
Holding Company Act of 1956 (the BHCA). The BHCA precludes a bank holding
company and its affiliates from engaging in certain activities, generally
including insurance underwriting. Under the BHCA in its current form,
Citigroup has two years from the date it became a bank holding company
(October 8, 1998) to comply with all applicable provisions (the BHCA
Compliance Period). The BHCA Compliance Period may be extended, at the
discretion of the Federal Reserve Board, for three additional one-year
periods so long as the extension is not deemed to be detrimental to the
public interest.
It is not expected that the restrictions of the BHCA will impede the
Company's existing businesses in any significant respect, although the
Company may be limited in its ability to make certain acquisitions. At this
time, the Company believes that its compliance with the BHCA or other
applicable laws will not have a significant adverse effect on its financial
condition or results of operations.
There is pending federal legislation that would, if enacted, amend the BHCA
to authorize a bank holding company to own certain insurance underwriters.
There is no assurance that such legislation will be enacted. At the
expiration of the BHCA Compliance Period, the Company and Citigroup each
will evaluate its alternatives in order to comply with whatever laws are
then applicable.
12
<PAGE> 13
TRAVELERS PROPERTY CASUALTY CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Results of Operations reflect the consolidated results of operations of
Travelers Property Casualty Corp. (TAP) and its subsidiaries (the Company). The
Company provides a wide range of commercial and personal property and casualty
insurance products and services to businesses, associations and individuals
throughout the United States.
On October 8, 1998, Citicorp merged with and into a newly formed wholly-owned
subsidiary of Travelers Group Inc. (Travelers Group) (the Merger), the indirect
owner of approximately 84% of the outstanding common stock of TAP. Following the
Merger, Travelers Group changed its name to Citigroup Inc. (Citigroup).
Upon consummation of the Merger, Citigroup became a bank holding company subject
to the provisions of the Bank Holding Company Act of 1956 (the BHCA). The BHCA
precludes a bank holding company and its affiliates from engaging in certain
activities, generally including insurance underwriting. Under the BHCA in its
current form, Citigroup has two years from the date it became a bank holding
company to comply with all applicable provisions (the BHCA Compliance Period).
The BHCA Compliance Period may be extended, at the discretion of the Federal
Reserve Board, for three additional one-year periods so long as the extension is
not deemed to be detrimental to the public interest.
It is not expected that the restrictions of the BHCA will impede the Company's
existing businesses in any significant respect, although the Company may be
limited in its ability to make certain acquisitions. At this time, the Company
believes that its compliance with the BHCA or other applicable laws will not
have a significant adverse effect on its financial condition or results of
operations.
There is pending federal legislation that would, if enacted, amend the BHCA to
authorize a bank holding company to own certain insurance underwriters. There is
no assurance that such legislation will be enacted. At the expiration of the
BHCA Compliance Period, the Company and Citigroup each will evaluate its
alternatives in order to comply with whatever laws are then applicable.
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS OF OPERATIONS THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(in millions, except per share data) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues ............................................................ $2,634 $2,532 $5,207 $5,126
- ------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of changes in accounting principles . $ 354 $ 313 $ 688 $ 660
Cumulative effect of changes in accounting principles ............... -- -- (133) --
- ------------------------------------------------------------------------------------------------------------------------------
Net income (1) ...................................................... $ 354 $ 313 $ 555 $ 660
- ------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income before cumulative effect of changes in accounting principles $ 0.91 $ 0.80 $ 1.76 $ 1.68
Cumulative effect of changes in accounting principles ............. -- -- (0.34) --
- ------------------------------------------------------------------------------------------------------------------------------
Net income ........................................................ $ 0.91 $ 0.80 $ 1.42 $ 1.68
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average number of common shares outstanding .............. 389.2 392.4 389.4 392.3
- ------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE
Income before cumulative effect of changes in accounting principles $ 0.91 $ 0.80 $ 1.76 $ 1.68
Cumulative effect of changes in accounting principles ............. -- -- (0.34) --
- ------------------------------------------------------------------------------------------------------------------------------
Net income ........................................................ $ 0.91 $ 0.80 $ 1.42 $ 1.68
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding and common stock equivalents ................ 390.3 392.9 390.5 392.8
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net income includes $21 million and $7 million of realized investment gains
in the three months ended June 30, 1999 and 1998, respectively, and $31
million and $50 million of realized investment gains in the six months ended
June 30, 1999 and 1998, respectively.
13
<PAGE> 14
CONSOLIDATED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND
1998
Operating earnings, which exclude realized investment gains, were $333 million
or $0.86 per share in the second quarter of 1999, an increase of $27 million or
$0.08 per share from $306 million or $0.78 per share in the second quarter of
1998. The increase in operating earnings was primarily the result of favorable
prior-year reserve development, lower weather-related losses and lower operating
expenses in Commercial Lines and an increase in income due to the growth in
earned premiums in Personal Lines, partially offset by higher catastrophe losses
in Personal Lines.
Revenues of $2.634 billion in the second quarter of 1999 increased $102 million
from $2.532 billion in the second quarter of 1998. This increase was primarily
attributable to a $103 million increase in earned premiums, a $21 million
increase in realized investment gains, partially offset by a $10 million
decrease in fee income and a $10 million decrease in net investment income. The
increase in earned premiums was primarily due to increased production in
Personal Lines.
Net investment income was $510 million in the second quarter of 1999, a decrease
of $10 million from the second quarter of 1998, reflecting an increase in
tax-exempt securities.
Fee income in the second quarter of 1999 was $67 million, a $10 million decrease
from the second quarter of 1998. National Accounts within Commercial Lines is
the primary source of fee income due to its service business. This decrease in
fee income was primarily due to the depopulation of involuntary pools serviced
by the Company.
Claims and expenses of $2.154 billion in the second quarter of 1999 increased
$48 million from the second quarter of 1998. The increase was primarily the
result of increased claims related to the growth in premiums in Personal Lines,
partially offset by a reduction in general and administrative expenses and
favorable prior-year reserve development in Commercial Lines.
The Company's effective federal tax rate was 26% in the second quarter of 1999
compared to 27% in the second quarter of 1998. These rates were lower than the
statutory tax rate in both periods primarily due to non-taxable investment
income. The rate in the second quarter of 1999 was less than the rate in the
second quarter of 1998 primarily due to the Company's decision to invest more
heavily in tax-exempt securities.
The statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 1998
---- ----
<S> <C> <C>
STATUTORY:
Loss and loss adjustment expense (LAE) ratio......................... 72.5% 73.2%
Underwriting expense ratio........................................... 28.2 29.5
Combined ratio before policyholder dividends......................... 100.7 102.7
Combined ratio....................................................... 101.1 103.4
- ----------------------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio................................................... 72.3% 72.8%
Underwriting expense ratio........................................... 28.6 29.2
Combined ratio before policyholder dividends......................... 100.9 102.0
Combined ratio....................................................... 101.3 102.7
==========================================================================================================
</TABLE>
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
14
<PAGE> 15
The decrease in the second quarter of 1999 statutory and GAAP combined ratios
before policyholder dividends compared to the second quarter of 1998 was due to
favorable prior-year reserve development, lower weather-related losses and
continued expense reductions in Commercial Lines, offset in part by lower fee
income in Commercial Lines and higher catastrophe losses in Personal Lines.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
1998
Net income was $555 million in the first six months of 1999 compared to $660
million in the first six months of 1998. Net income in 1999 included a charge of
$160 million related to the initial adoption of the Accounting Standards
Executive Committee of the American Institute of Certified Public Accountants'
(AcSEC) Statement of Position 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" (SOP 97-3) and a benefit of $27
million related to the initial adoption of AcSEC Statement of Position 98-7,
"Deposit Accounting: Accounting for Insurance and Reinsurance Contracts That Do
Not Transfer Insurance Risk" (SOP 98-7). The net charge of $133 million due to
the initial adoption of these Statements of Position has been accounted for as a
cumulative effect of a change in accounting principles.
Excluding realized investment gains and the cumulative effect of changes in
accounting principles in the first six months of 1999 described above, operating
income was $657 million or $1.68 per share (diluted) for the six months ended
June 30, 1999 compared to $610 million or $1.55 per share (diluted) for the six
months ended June 30, 1998. The increase in operating income in the six months
ended June 30, 1999 compared to the six months ended June 30, 1998 was due to
favorable prior-year reserve development and lower operating expenses in
Commercial Lines and an increase in income due to the growth in earned premiums
in Personal Lines, partially offset by higher catastrophe losses in Personal
Lines and higher weather-related losses in Commercial Lines.
The statutory and GAAP combined ratios were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 1998
---- ----
<S> <C> <C>
STATUTORY:
Loss and LAE ratio.................................................... 72.2% 73.1%
Underwriting expense ratio............................................ 28.1 28.9
Combined ratio before policyholder dividends.......................... 100.3 102.0
Combined ratio........................................................ 100.8 102.7
- ----------------------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio.................................................... 72.0% 72.8%
Underwriting expense ratio............................................ 28.4 29.1
Combined ratio before policyholder dividends.......................... 100.4 101.9
Combined ratio........................................................ 100.9 102.6
==========================================================================================================
</TABLE>
GAAP combined ratios differ from statutory combined ratios primarily due to the
deferral and amortization of certain expenses for GAAP reporting purposes only.
The first six months of 1999 statutory and GAAP combined ratios before
policyholder dividends include an adjustment in Personal Lines associated with
the termination of a quota share reinsurance arrangement. Excluding this
adjustment, the statutory and GAAP combined ratios before policyholder dividends
for the first six months of 1999 would have been 100.1% and 100.9%,
respectively. The decrease in the first six months of 1999 statutory and GAAP
combined ratios before policyholder dividends excluding this adjustment compared
to the first six months of 1998 was due to favorable prior-year reserve
development in Commercial Lines, continued productivity improvements and expense
savings, partially offset by higher weather-related losses and lower fee income
in Commercial Lines and higher catastrophe losses in Personal Lines.
The other consolidated operating trends for the six months ended June 30, 1999
and 1998 are substantially the same as noted above for the quarters then ended.
15
<PAGE> 16
SEGMENT RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
COMMERCIAL LINES
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 1998
---- ----
<S> <C> <C>
(in millions)
Revenues........................................................................ $ 1,618 $ 1,620
Net income (1).................................................................. $ 279 $ 235
===================================================================================================================
</TABLE>
(1) Commercial Lines net income includes $22 million and $7 million of realized
investment gains in the three months ended June 30, 1999 and 1998,
respectively.
Commercial Lines operating income, which excludes realized investment gains, was
$257 million in the second quarter of 1999 compared to $228 million in the
second quarter of 1998. This increase was due to favorable prior-year reserve
development, lower weather-related losses and continued expense savings,
partially offset by a decrease in fee income. Operating results reflected the
Company's long-standing insistence on maintaining discipline in the highly
competitive commercial lines marketplace and on growing business only where
market conditions warrant.
Revenues were $1.618 billion in the second quarter of 1999 compared to $1.620
billion in the second quarter of 1998. This slight decrease primarily reflected
lower net investment income and lower fee income, mostly offset by higher
realized investment gains.
Commercial Lines net written premiums in the second quarter of 1999 totaled
$1.095 billion, down $26 million from $1.121 billion in the second quarter of
1998. This decrease reflected the highly competitive marketplace and the
Company's continued disciplined approach to underwriting and risk management.
Fee income in the second quarter of 1999 was $67 million compared to $77 million
in the second quarter of 1998. The $10 million decrease in fee income was
primarily due to the depopulation of involuntary pools serviced by the Company.
National Accounts works with national brokers and regional agents providing
insurance coverages and services, primarily workers' compensation, mainly to
large corporations. National Accounts also includes the alternative market
business, which sells claims and policy management services to workers'
compensation and automobile assigned risk plans and to self-insurance pools
throughout the United States. National Accounts net written premiums were $101
million in the second quarter of 1999 compared to $121 million in the second
quarter of 1998. The $20 million decrease reflected the impact of additional
reinsurance coverage and the Company's continued disciplined approach to
underwriting and risk management.
National Accounts new business was significantly lower in the second quarter of
1999 than in the second quarter of 1998, reflecting the Company's continued
disciplined approach to underwriting and risk management. National Accounts
business retention ratio was significantly higher in the second quarter of 1999
than in the second quarter of 1998, reflecting the loss of a large account in
1998.
Commercial Accounts serves mid-sized businesses for casualty products and both
large and mid-sized businesses for property products through a network of
independent agents and brokers. Commercial Accounts net written premiums were
$440 million in the second quarter of 1999 compared to $441 million in the
second quarter of 1998. The slight decrease reflected the Company's continued
disciplined approach to underwriting and risk management, offset by the benefits
of rate increases.
16
<PAGE> 17
Commercial Accounts new business in the second quarter of 1999 was moderately
lower than in the second quarter of 1998, reflecting the Company's focus on
obtaining new accounts only where it can maintain its selective underwriting
policy. Commercial Accounts business retention ratio was moderately higher in
the second quarter of 1999 than in the second quarter of 1998. Commercial
Accounts continues to focus on maintaining its product pricing standards and its
selective underwriting policy in the renewal of accounts.
Select Accounts serves small businesses through a network of independent agents.
Select Accounts net written premiums were $394 million in both the second
quarter of 1999 and the second quarter of 1998, reflecting the highly
competitive marketplace and the Company's continued disciplined approach to
underwriting and risk management.
New premium business in Select Accounts was significantly lower in the second
quarter of 1999 compared to the second quarter of 1998, reflecting its selective
underwriting policy in the highly competitive marketplace. Select Accounts
business retention ratio remained strong in the second quarter of 1999 and was
virtually the same as that in the second quarter of 1998.
Specialty Accounts markets products to national, mid-sized and small customers
and distributes them through both wholesale brokers and retail agents and
brokers throughout the United States. Specialty Accounts net written premiums
were $160 million in the second quarter of 1999 compared to $165 million in the
second quarter of 1998. This decrease primarily reflected a highly competitive
marketplace and the Company's continued disciplined approach to underwriting and
risk management.
Commercial Lines claims and expenses of $1.244 billion in the second quarter of
1999 were down from $1.305 billion in the second quarter of 1998. This decrease
was due to favorable prior-year reserve development, lower weather-related
losses, lower losses due to the impact of workers' compensation managed care
delivery programs and continued expense savings in operations.
Catastrophe losses, net of taxes and reinsurance, were $10 million in both the
second quarter of 1999 and 1998. The 1999 catastrophe losses were due to
tornadoes in Oklahoma. The 1998 catastrophe losses were primarily due to
tornadoes in Nashville, Tennessee.
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 1998
---- ----
<S> <C> <C>
STATUTORY:
Loss and LAE ratio..................................................... 75.1% 79.0%
Underwriting expense ratio............................................. 30.5 30.8
Combined ratio before policyholder dividends........................... 105.6 109.8
Combined ratio......................................................... 106.3 111.0
- -----------------------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio..................................................... 74.8% 78.4%
Underwriting expense ratio............................................. 31.4 31.5
Combined ratio before policyholder dividends........................... 106.2 109.9
Combined ratio......................................................... 106.9 111.1
===========================================================================================================
</TABLE>
GAAP combined ratios for Commercial Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
The decrease in the second quarter of 1999 statutory and GAAP combined ratios
before policyholder dividends compared to the second quarter of 1998 was due to
favorable prior-year reserve development and lower weather-related losses,
partially offset by lower fee income.
17
<PAGE> 18
PERSONAL LINES
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 1998
---- ----
<S> <C> <C>
(in millions)
Revenues.............................................................. $1,016 $ 910
Net income (1)........................................................ $ 102 $ 107
======================================================================================================
</TABLE>
(1) Personal Lines net income includes $1 million of realized investment losses
in the three months ended June 30, 1999.
Personal Lines operating income, which excludes realized investment gains and
losses, was $103 million in the second quarter of 1999 compared to $107 million
in the second quarter of 1998. The 1999 decrease reflects higher catastrophe
losses, higher loss ratios in the TRAVELERS SECURE(R) program and lower
favorable prior-year reserve development, mostly offset by an increase in income
due to the growth in earned premiums. The TRAVELERS SECURE(R) program markets
Personal Lines products through the independent agents of Primerica Financial
Services, a unit of Citigroup.
Revenues were $1.016 billion in the second quarter of 1999 compared to $910
million in the second quarter of 1998. This increase primarily reflected an
increase in earned premiums of $103 million.
Net written premiums in the second quarter of 1999 were $951 million compared to
$874 million in the second quarter of 1998. This increase reflected growth in
target markets served by independent agents and growth in affinity group
marketing, joint marketing arrangements and the TRAVELERS SECURE(R) program.
During this period, the Company realigned its underwriting standards for its
TRAVELERS SECURE(R) product to offset a more competitive rate environment and to
improve margins in this business. Business retention continued to be strong.
Personal Lines claims and expenses of $868 million in the second quarter of 1999
increased $114 million from the second quarter of 1998. This increase was
primarily the result of higher losses associated with the growth in premiums,
higher catastrophe losses, a modest increase in medical costs associated with
claim payouts and lower favorable prior-year reserve development.
Catastrophe losses, net of taxes and reinsurance, were $23 million in the second
quarter of 1999, compared to $13 million in the second quarter of 1998. The 1999
catastrophe losses were due to wind and hail storms on the East Coast and
tornadoes in the Midwest. The 1998 catastrophe losses were due to tornadoes and
wind and hail storms in the Southeast and Midwest.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 1998
---- ----
<S> <C> <C>
STATUTORY:
Loss and LAE ratio.................................................. 69.3% 65.2%
Underwriting expense ratio.......................................... 25.5 27.7
Combined ratio...................................................... 94.8 92.9
- -----------------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio.................................................. 69.3% 65.2%
Underwriting expense ratio.......................................... 25.4 26.3
Combined ratio...................................................... 94.7 91.5
=====================================================================================================
</TABLE>
GAAP combined ratios for Personal Lines differ from statutory combined ratios
primarily due to the deferral and amortization of certain expenses for GAAP
reporting purposes only.
18
<PAGE> 19
The increase in the second quarter of 1999 statutory and GAAP Loss and LAE
ratios compared to the second quarter of 1998 was primarily due to lower
favorable prior-year reserve development in the automobile bodily injury line,
higher loss ratios in the TRAVELERS SECURE(R) program and higher catastrophe
losses. The decrease in the statutory and GAAP underwriting expense ratios in
the second quarter of 1999 compared to the second quarter of 1998 reflected
greater efficiency through the leveraging of the Company's expense base as
premiums grow.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999 1998
---- ----
<S> <C> <C>
(in millions)
Revenues........................................................................ $ 0 $ 2
Net loss........................................................................ $ (27) $ (29)
=================================================================================================================
</TABLE>
The primary component of net loss for both the second quarter of 1999 and 1998
was after-tax interest expense of $26 million.
SEGMENT RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
COMMERCIAL LINES
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 1998
---- ----
<S> <C> <C>
(in millions)
Revenues........................................................................ $ 3,197 $ 3,317
------- -------
Income before cumulative effect of changes in accounting principles............. $ 536 $ 495
Cumulative effect of changes in accounting principles........................... (133) -
------- -------
Net income (1) ................................................................ $ 403 $ 495
==========================================================================================================
</TABLE>
(1) Commercial Lines net income includes $34 million and $42 million of realized
investment gains in the six months ended June 30, 1999 and 1998,
respectively.
Net income was $403 million in the first six months of 1999 compared to $495
million in the first six months of 1998. Net income in 1999 included a charge in
the first quarter of $160 million related to the initial adoption of SOP 97-3
and a benefit of $27 million related to the initial adoption of SOP 98-7. The
net charge of $133 million due to the initial adoption of these Statements of
Position has been accounted for as a cumulative effect of a change in accounting
principles.
Commercial Lines operating income, which excludes realized investment gains and
the cumulative effect of changes in accounting principles in the first quarter
of 1999 described above, was $502 million in the six months ended June 30, 1999,
compared to $453 million in the six months ended June 30, 1998. The increase in
operating income in the 1999 period was due to favorable prior-year reserve
development and continued expense savings, partially offset by increased losses
from weather-related events and lower fee income.
Revenues were $3.197 billion in the first six months of 1999 compared to $3.317
billion in the first six months of 1998. This decrease reflected lower earned
premiums, realized investment gains, net investment income and fee income.
19
<PAGE> 20
Commercial Lines net written premiums in the first six months of 1999 totaled
$2.209 billion, down $124 million from $2.333 billion in the first six months of
1998, reflecting the highly competitive marketplace and the Company's continued
disciplined approach to underwriting and risk management.
Fee income in the first six months of 1999 was $134 million, a $25 million
decrease from the first six months of 1998. This decrease was primarily due to
the depopulation of involuntary pools serviced by the Company.
National Accounts net written premiums were $251 million in the first six months
of 1999 compared to $308 million in the first six months of 1998. This decrease
reflects the impact of additional reinsurance coverage and the Company's
continued disciplined approach to underwriting and risk management. National
Accounts new business in the first six months of 1999 was significantly lower
compared to the first six months of 1998, reflecting the Company's continued
disciplined approach to the highly competitive marketplace. National Accounts
business retention ratio was moderately higher in the first six months of 1999
compared to the first six months of 1998, reflecting the loss of one large
account in the second quarter of 1998.
Commercial Accounts net written premiums were $884 million in the first six
months of 1999 compared to $904 million in the first six months of 1998. This
decrease reflected the Company's continued disciplined approach to underwriting
and risk management, partially offset by the benefits of rate increases. For the
first six months of 1999, new premium business in Commercial Accounts
significantly declined compared to the first six months of 1998, reflecting the
Company's focus on obtaining new business accounts only where it can maintain
its selective underwriting policy. The Commercial Accounts business retention
ratio in the first six months of 1999 remained virtually the same compared to
the first six months of 1998. Commercial Accounts continues to focus on the
retention of existing business while maintaining its product pricing standards
and its selective underwriting policy.
Select Accounts net written premiums of $766 million in the first six months of
1999 decreased $6 million from $772 million in the first six months of 1998. The
decrease in Select Accounts net written premiums reflected the highly
competitive marketplace and the Company's continued disciplined approach to
underwriting and risk management. New premium business in Select Accounts was
significantly lower in the first six months of 1999 compared to the first six
months of 1998, reflecting its selective underwriting policy in the highly
competitive marketplace. Select Accounts business retention ratio remained
strong in the first half of 1999 and was virtually the same as that in the first
half of 1998.
Specialty Accounts net written premiums were $308 million in the first six
months of 1999 compared to $349 million in the first six months of 1998. This
decrease primarily reflects the impact of additional reinsurance coverage, a
highly competitive marketplace and the Company's continued disciplined approach
to underwriting and risk management.
Commercial Lines claims and expenses of $2.481 billion in the first six months
of 1999 decreased $163 million from the first six months of 1998. This decrease
was primarily attributable to favorable prior-year reserve development and
continued expense savings, partially offset by higher weather-related losses in
the first six months of 1999.
Catastrophe losses, net of taxes and reinsurance, were $10 million in the first
six months of both 1999 and 1998. The 1999 catastrophe losses were due to
tornadoes in Oklahoma in the second quarter. The 1998 catastrophe losses were
primarily due to tornadoes in Nashville, Tennessee in the second quarter.
20
<PAGE> 21
Statutory and GAAP combined ratios for Commercial Lines were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 1998
- ------------------------- ---- ----
<S> <C> <C>
STATUTORY:
Loss and LAE ratio......................................................... 75.7% 78.6%
Underwriting expense ratio................................................. 29.5 29.6
Combined ratio before policyholder dividends............................... 105.2 108.2
Combined ratio............................................................. 106.1 109.4
- ------------------------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio......................................................... 75.3% 78.1%
Underwriting expense ratio................................................. 31.3 30.8
Combined ratio before policyholder dividends............................... 106.6 108.9
Combined ratio............................................................. 107.5 110.1
============================================================================================================
</TABLE>
The decrease in the first six months of 1999 statutory and GAAP combined ratios
before policyholder dividends compared to the first six months of 1998 was due
to favorable prior-year reserve development, partially offset by higher
weather-related losses and lower fee income.
PERSONAL LINES
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 1998
---- ----
<S> <C> <C>
(in millions)
Revenues........................................................................ $ 2,010 $ 1,803
Net income (1).................................................................. $ 209 $ 223
=============================================================================================================
</TABLE>
(1) Personal Lines net income includes $3 million of realized investment losses
in the six months ended June 30, 1999 and $8 million of realized investment
gains in the six months ended June 30, 1998, respectively.
Personal Lines operating income, which excludes realized investment gains
(losses), was $212 million in the first six months of 1999 compared to $215
million in the first six months of 1998. The decrease in operating income in the
1999 period was primarily due to higher catastrophe losses, higher loss ratios
in the TRAVELERS SECURE(R) program and lower prior-year favorable reserve
development, mostly offset by the increase in income due to the growth in earned
premiums.
Net written premiums in the first six months of 1999 were $1.863 billion
(excluding an adjustment of $72 million due to a change in the quota share
reinsurance arrangement), compared to $1.680 billion in the first six months of
1998. This increase primarily reflects growth in target markets served by
independent agents and growth in affinity group marketing, joint marketing
arrangements and the TRAVELERS SECURE(R) program. During this period, the
Company realigned its underwriting standards for its TRAVELERS SECURE(R) product
to offset a more competitive rate environment and to improve margins in this
business. Business retention continued to be strong.
Personal Lines claims and expenses of $1.707 billion in the first six months of
1999 increased $232 million from the first six months of 1998. This increase was
primarily the result of higher losses associated with the growth in premiums and
higher catastrophe losses.
21
<PAGE> 22
Catastrophe losses, after taxes and reinsurance, were $31 million in the first
half of 1999 compared to $22 million in the first half of 1998. The 1999
catastrophe losses were due to wind and hail storms on the East Coast and
tornadoes in the Midwest in the second quarter and a wind and ice storm in the
Midwest and the Northeast in the first quarter. The 1998 catastrophe losses were
due to tornadoes and wind and hail storms in the Southeast and Midwest in the
second quarter and ice storms in northern New York and New England and
windstorms on the East Coast in the first quarter.
Statutory and GAAP combined ratios for Personal Lines were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 1998
---- ----
<S> <C> <C>
STATUTORY:
Loss and LAE ratio......................................................... 68.0% 65.2%
Underwriting expense ratio................................................. 26.5 27.9
Combined ratio............................................................. 94.5 93.1
- ---------------------------------------------------------------------------------------------------------------
GAAP:
Loss and LAE ratio......................................................... 68.0% 65.2%
Underwriting expense ratio................................................. 25.1 26.7
Combined ratio............................................................. 93.1 91.9
===============================================================================================================
</TABLE>
The first six months of 1999 statutory and GAAP combined ratios for Personal
Lines include an adjustment associated with the termination of a quota share
reinsurance arrangement. Excluding this adjustment, both the statutory and GAAP
combined ratios for the first six months of 1999 would have been 94.1%. The
increase in the first six months of 1999 statutory and GAAP combined ratios
excluding this adjustment compared to the first six months of 1998 was due to
higher catastrophe losses, higher loss ratios in the TRAVELERS SECURE(R) program
and lower favorable prior-year reserve development in the automobile bodily
injury line, partially offset by productivity improvements.
INTEREST EXPENSE AND OTHER
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 1998
---- ----
<S> <C> <C>
(in millions)
Revenues........................................................................ $ 0 $ 6
Net income (loss)............................................................... $ (57) $ (58)
=================================================================================================================
</TABLE>
The primary component of net income (loss) for the six months ended June 30,
1999 and 1998 was interest expense of $52 million and $53 million after tax,
respectively.
ENVIRONMENTAL CLAIMS
The Company's reserves for environmental claims are not established on a
claim-by-claim basis. An aggregate bulk reserve is carried for all of the
Company's environmental claims that are in the dispute process, until the
dispute is resolved. This bulk reserve is established and adjusted based upon
the aggregate volume of in-process environmental claims and the Company's
experience in resolving such claims. At June 30, 1999, approximately 18% of the
net aggregate reserve (i.e., approximately $140 million) consists of case
reserve for resolved claims. The balance, approximately 82% of the net aggregate
reserve (i.e., approximately $632 million), is carried in a bulk reserve and
includes incurred but not reported environmental claims for which the Company
has not received any specific claims.
22
<PAGE> 23
The following table displays activity for environmental losses and loss expenses
and reserves for the six months ended June 30, 1999 and 1998.
Environmental Losses
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 1998
---- ----
<S> <C> <C>
(in millions)
Beginning reserves:
Direct....................................................................... $ 928 $ 1,193
Ceded........................................................................ (96) (74)
- ----------------------------------------------------------------------------------------------------------------------
Net........................................................................ 832 1,119
Incurred losses and loss expenses:
Direct....................................................................... 80 54
Ceded........................................................................ (52) (27)
Losses paid:
Direct ...................................................................... 110 189
Ceded........................................................................ (22) (53)
- ----------------------------------------------------------------------------------------------------------------------
Ending reserves:
Direct....................................................................... 898 1,058
Ceded........................................................................ (126) (48)
- ----------------------------------------------------------------------------------------------------------------------
Net........................................................................ $ 772 $ 1,010
======================================================================================================================
</TABLE>
ASBESTOS CLAIMS
At June 30, 1999, approximately 21% of the net aggregate reserve (i.e.,
approximately $203 million) is for pending asbestos claims. The balance,
approximately 79% (i.e., approximately $754 million) of the net aggregate
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
In general, the Company posts case reserves for pending asbestos claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for asbestos losses and loss expenses and reserves for the six
months ended June 30, 1999 and 1998.
Asbestos Losses
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 1998
---- ----
<S> <C> <C>
(in millions)
Beginning reserves:
Direct....................................................................... $ 1,252 $ 1,363
Ceded........................................................................ (266) (249)
- -----------------------------------------------------------------------------------------------------------------
Net........................................................................ 986 1,114
Incurred losses and loss expenses:
Direct....................................................................... 68 62
Ceded........................................................................ (38) (28)
Losses paid:
Direct ...................................................................... 144 98
Ceded........................................................................ (85) (35)
- -----------------------------------------------------------------------------------------------------------------
Ending reserves:
Direct....................................................................... 1,176 1,327
Ceded........................................................................ (219) (242)
- -----------------------------------------------------------------------------------------------------------------
Net........................................................................ $ 957 $ 1,085
=================================================================================================================
</TABLE>
23
<PAGE> 24
UNCERTAINTY REGARDING ADEQUACY OF ENVIRONMENTAL AND ASBESTOS RESERVES
It is difficult to estimate the reserves for environmental and asbestos-related
claims due to the vagaries of court coverage decisions, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties. Conventional actuarial techniques are not used to estimate such
reserves.
The reserves carried for environmental and asbestos claims at June 30, 1999 are
the Company's best estimate of ultimate claims and claim adjustment expenses
based upon known facts and current law. However, the conditions surrounding the
final resolution of these claims continue to change. Currently, it is not
possible to predict changes in the legal and legislative environment and their
impact on the future development of asbestos and environmental claims. Such
development will be affected by future court decisions and interpretations as
well as changes in legislation applicable to such claims. Because of these
future unknowns, additional liabilities may arise for amounts in excess of the
current reserves. These additional amounts, or a range of these additional
amounts, cannot now be reasonably estimated, and could result in a liability
exceeding reserves by an amount that would be material to the Company's
operating results in a future period. However, the Company believes that it is
not likely that these claims will have a material adverse effect on the
Company's financial condition or liquidity.
CUMULATIVE INJURY OTHER THAN ASBESTOS (CIOTA) CLAIMS
CIOTA claims are generally submitted to the Company under general liability
policies and often involve an allegation by a claimant against an insured that
the claimant has suffered injuries as a result of long-term or continuous
exposure to potentially harmful products or substances. Such potentially harmful
products or substances include, but are not limited to, lead paint, pesticides,
pharmaceutical products, silicone-based personal products, solvents and other
deleterious substances.
At June 30, 1999, approximately 22% of the net aggregate reserve (i.e.,
approximately $205 million) is for pending CIOTA claims. The balance,
approximately 78% (i.e., approximately $721 million) of the net aggregate
reserve, represents incurred but not reported losses for which the Company has
not received any specific claims.
In general, the Company posts case reserves for pending CIOTA claims within
approximately 30 business days of receipt of such claims. The following table
displays activity for CIOTA losses and loss expenses and reserves for the six
months ended June 30, 1999 and 1998.
CIOTA Losses
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 1998
- ------------------------- ---- ----
<S> <C> <C>
(in millions)
Beginning reserves:
Direct....................................................................... $ 1,346 $ 1,520
Ceded........................................................................ (392) (432)
- ----------------------------------------------------------------------------------------------------------------------
Net........................................................................ 954 1,088
Incurred losses and loss expenses:
Direct....................................................................... (23) (18)
Ceded........................................................................ 20 15
Losses paid:
Direct....................................................................... 51 35
Ceded........................................................................ (26) (5)
- ----------------------------------------------------------------------------------------------------------------------
Ending reserves:
Direct....................................................................... 1,272 1,467
Ceded........................................................................ (346) (412)
- ----------------------------------------------------------------------------------------------------------------------
Net........................................................................ $ 926 $ 1,055
======================================================================================================================
</TABLE>
24
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES
TAP was formed in January 1996 to hold the property and casualty insurance
subsidiaries of The Travelers Insurance Group Inc. (TIGI). TAP's principal asset
is the capital stock of its insurance subsidiaries.
The liquidity requirements of the Company's business have been met primarily by
funds generated from operations, asset maturities and income received on
investments. Cash provided from these sources is used primarily for claims and
claim adjustment expense payments and operating expenses. Catastrophe claims,
the timing and amount of which are inherently unpredictable, may create
increased liquidity requirements. Additional sources of cash flow include the
sale of invested assets and financing activities. The Company believes that its
future liquidity needs will be met from all of the above sources.
Net cash flows are generally invested in marketable securities. The Company
closely monitors the duration of these investments, and investment purchases and
sales are executed with the objective of having adequate funds available to
satisfy the Company's maturing liabilities. As the Company's investment strategy
focuses on asset and liability durations, and not specific cash flows, asset
sales may be required to satisfy obligations and/or rebalance asset portfolios.
The Company's invested assets at June 30, 1999 totaled $31.2 billion, of which
85.5% was invested in fixed maturity investments, 3.6% in common stocks and
other equity securities, 2.0% in mortgage loans and real estate held for sale
and 8.9% in short-term and other investments. The average duration of the fixed
maturity portfolio, including short-term investments, was 5.4 years at such
date. Included in fixed maturity investments are non-investment grade securities
totaling $1.4 billion, representing 5.3% of the Company's fixed maturity
investments as of June 30, 1999. The following table reflects the average yield
(annualized) of the investment portfolio excluding unrealized and realized
investment gains and losses:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
Average Yield (Annualized) 1999 1998 1999 1998
-------------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Before tax 6.82% 7.09% 6.80% 7.05%
After tax 4.99% 5.12% 4.97% 5.06%
</TABLE>
Cash flow needs at TAP include stockholder dividends and debt service. TAP is a
holding company and has no direct operations. Accordingly, TAP meets its cash
flow needs primarily through dividends from operating subsidiaries. In addition,
TAP currently has available to it a $200 million line of credit for working
capital and other general corporate purposes from a subsidiary of Citigroup. The
lender has no obligation to make any loan to TAP under this line of credit.
Also, TAP will continue to be able to make borrowings from a syndicate of banks
under a Credit Facility, which it has reduced to $250 million, none of which is
currently utilized. The Credit Facility expires in December 2001. Under the
Credit Facility, TAP is required to maintain a certain level of consolidated
stockholders' equity (as defined in the agreement). At June 30, 1999, this
requirement was exceeded by approximately $4.5 billion. In addition, the Credit
Facility places restrictions on the amount of consolidated debt TAP can incur.
If the Company had borrowings under the Credit Facility, the interest rate would
be based upon LIBOR plus a negotiated margin. TAP compensates the banks for the
Credit Facility through commitment fees. TAP also issues commercial paper
directly to investors and maintains unused credit availability under the Credit
Facility at least equal to the amount of commercial paper outstanding. At June
30, 1999, TAP had no commercial paper outstanding.
At June 30, 1999, TAP had issued a total of $1.25 billion of, and had $750
million available for, debt offerings under its shelf registration statement.
TAP's insurance subsidiaries are subject to various regulatory restrictions that
limit the maximum amount of dividends available to be paid to their parent
without prior approval of insurance regulatory authorities. Dividend payments to
TAP from its insurance subsidiaries are limited to $1.0 billion in 1999 without
prior approval of the Connecticut Insurance Department. TAP has received $300
million of dividends from its insurance subsidiaries during the first six months
of 1999.
25
<PAGE> 26
On January 19, 1999 and January 28, 1998, the Company, through the Travelers
Property Casualty Corp. Capital Accumulation Plan, reissued 476,189 and 763,654
shares, respectively, of treasury stock in the form of restricted Class A Common
Stock to participating officers and other key employees. The fair market values
per share of the 1999 and 1998 restricted stock awards at the grant date were
$31.88 and $43.71, respectively. The restricted stock generally vests after a
three-year period. Except under limited circumstances, the stock cannot be sold
or transferred during the restricted period by the participant, who is required
to render service to the Company during the restricted period. Unearned
compensation expense associated with the restricted stock grant represents the
market value of TAP's common stock at the date of grant and is recognized as a
charge to income ratably over the vesting period. The compensation cost charged
to earnings for these restricted Class A Common Stock awards, as well as
previous awards, was $11 million and $9 million for the six months ended June
30, 1999 and 1998, respectively. At June 30, 1999, there were 5,844,149 shares
available for future grants under all existing plans of TAP, including, but not
limited to the restricted stock plan.
YEAR 2000 DATE CONVERSION
The Company is highly dependent on computer systems and system applications for
conducting its ongoing business functions. In 1996, the Company began the
process of identifying, evaluating and implementing changes to computer programs
necessary to address the Year 2000 issue. This issue involves the ability of
computer systems that have time sensitive programs to recognize properly the
year 2000. The inability to do so could result in major failures or
miscalculations that would disrupt the Company's ability to meet its customer
and other obligations on a timely basis.
The Company has achieved compliance with respect to its business critical
systems in accordance with its Year 2000 plan and has completed the process of
certification to validate compliance. An ongoing re-certification process will
be put in place for the third and fourth quarter of 1999 to ensure all business
critical systems and products remain compliant.
The total pre-tax cost associated with the required modifications and
conversions is expected to be approximately $52 million and is being expensed as
incurred in the period 1996 through 1999. As of June 30, 1999, the Company has
incurred approximately $47 million to date on these efforts. The Company also
has third party customers, financial institutions, vendors and others with whom
it conducts business and has confirmed their plans to address and resolve Year
2000 issues on a timely basis. While it is likely that these efforts by third
party vendors and customers will be successful, it is possible that a series of
failures by third parties could have a material adverse effect on the Company's
results of operations in future periods.
In addition, the Company has developed business resumption contingency plans to
address perceived risks associated with the Year 2000 effort. These plans
address the possibility of internal systems failures and the possibility of
failure of systems or processes outside the Company's control. These business
resumption contingency plans would enable business critical units to function
on January 1, 2000 in the event of an unexpected failure. Preparations for the
management of the date change will continue through 1999.
An additional Year 2000 issue for the Company is the potential future impact of
claims for insurance coverage from customers who suffer Year 2000 business
losses or claim coverage for their potential liability to third parties. The
Company has taken certain initiatives to mitigate this potential risk, including
addressing Year 2000 issues, where applicable, in the underwriting of insurance
policies. Losses for Year 2000 insurance claims and litigation costs related to
such claims are not reasonably estimable at this time.
26
<PAGE> 27
FUTURE APPLICATION OF ACCOUNTING STANDARDS
See Note 2 of Notes to Condensed Consolidated Financial Statements for a
discussion of recently issued accounting pronouncements.
FORWARD-LOOKING STATEMENTS
Certain of the statements contained herein that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. The Company's actual results may differ materially from
those included in the forward-looking statements. Forward-looking statements are
typically identified by the words or phrases such as "believe," "expect,"
"anticipate," "intend," "estimate," "may affect," and similar expressions or
future or conditional verbs such as "will," "should," "would," and "could."
These forward-looking statements involve risks and uncertainties including, but
not limited to, the following: the resolution of legal proceedings and related
matters; the conduct of the Company's businesses following the Merger; customer
responsiveness to both new products and distribution channels; the actual amount
of liabilities associated with certain environmental and asbestos-related
insurance claims; and the ability of the Company and third party vendors to
modify computer systems for the Year 2000 date conversion in a timely manner.
Readers are also directed to other risks and uncertainties discussed in
documents filed by the Company with the Securities and Exchange Commission.
27
<PAGE> 28
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For information concerning sixteen purported class actions and one multi-party
suit, with substantially the same allegations, commenced in various courts
against certain subsidiaries of the Company, dozens of other insurers and the
National Council on Compensation Insurance ("NCCI"), see the description that
appears in the second paragraph under the caption "Legal Proceedings" beginning
on page 43 of the Annual Report on Form 10-K of TAP for the year ended December
31, 1998 (File No. 1-14328), which description is incorporated by reference
herein. A copy of the foregoing description is included as an exhibit to this
Form 10-Q. In May 1999, the federal appellate court in Florida remanded the case
to the district court. In June 1999, the Michigan court denied defendants'
motion to dismiss the conspiracy count. In July 1999, the Georgia Supreme Court
heard plaintiffs' appeal from the dismissal of the complaint; the New York court
dismissed the complaint in substantial part and the Illinois court dismissed the
complaint but granted plaintiffs leave to replead limited claims against limited
defendants.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
See Exhibit Index.
(b) REPORTS ON FORM 8-K:
No reports on Form 8-K were filed during the quarter ended June
30, 1999.
28
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
3.01 Restated Certificate of Incorporation of Travelers Property
Casualty Corp. (the "Company"), Certificate of Designations,
Powers, Preferences and Rights of 7.5% Redeemable Preferred Stock,
Series Z, of the Company, Certificate of Amendment to the Restated
Certificate of Incorporation, filed March 7, 1997, and Certificate
of Amendment to the Restated Certificate of Incorporation, filed
April 23, 1997, incorporated by reference to Exhibit 3.01 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1997 (File No. 1-14328) (the "Company's 3/31/97
10-Q").
3.02 Restated By-Laws of the Company, effective April 23, 1997,
incorporated by reference to Exhibit 3.02 to the Company's 3/31/97
10-Q.
12.01+ Computation of Ratio of Earnings to Fixed Charges.
27.01+ Financial Data Schedule.
99.01+ The second paragraph under the caption "Legal Proceedings"
beginning on page 43 of the Annual Report on Form 10-K of the
Company for the year ended December 31, 1998 (File No. 1-14328).
</TABLE>
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the Securities and Exchange Commission
upon request.
+ Filed herewith.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRAVELERS PROPERTY CASUALTY CORP.
Date: August 11, 1999 By /s/ William P. Hannon
--------------------------------------
William P. Hannon
Chief Financial Officer
(Principal Financial Officer)
Date: August 11, 1999 By /s/ Douglas K. Russell
--------------------------------------
Douglas K. Russell
Chief Accounting Officer
(Principal Accounting Officer)
30
<PAGE> 1
Exhibit 12.01
Travelers Property Casualty Corp. and Subsidiaries
Computation of Ratio of Earnings to Fixed Charges
(In millions of dollars, except for ratio)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income before federal income taxes and cumulative
effect of changes in accounting principles $ 480 $ 426 $ 931 $ 912
Interest 40 40 80 81
Portion of rentals deemed to be interest 12 12 23 24
------- -------- -------- --------
Earnings available for fixed charges $ 532 $ 478 $ 1,034 $ 1,017
======= ======== ======== ========
Fixed charges:
Interest $ 40 $ 40 $ 80 $ 81
Portion of rentals deemed to be interest 12 12 23 24
------- -------- -------- --------
Total fixed charges $ 52 $ 52 $ 103 $ 105
======= ======== ======== ========
Ratio of earnings to fixed charges 10.23x 9.19x 10.04x 9.69x
======= ======== ======== ========
</TABLE>
The ratio of earnings to fixed charges is computed by dividing income before
federal income taxes and cumulative effect of changes in accounting principles
and fixed charges by the fixed charges. For purposes of this ratio, fixed
charges consist of that portion of rentals deemed representative of the
appropriate interest factor.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
TRAVELERS PROPERTY CASUALTY CORP.'S FINANCIAL STATEMENTS AS OF JUNE 30, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 26,672
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,117
<MORTGAGE> 553
<REAL-ESTATE> 86
<TOTAL-INVEST> 31,207
<CASH> 41
<RECOVER-REINSURE> 9,311
<DEFERRED-ACQUISITION> 531
<TOTAL-ASSETS> 51,572
<POLICY-LOSSES> 29,384
<UNEARNED-PREMIUMS> 4,292
<POLICY-OTHER> 2,051
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,250
900
0
<COMMON> 4
<OTHER-SE> 8,809
<TOTAL-LIABILITY-AND-EQUITY> 51,572
2,006
<INVESTMENT-INCOME> 510
<INVESTMENT-GAINS> 31
<OTHER-INCOME> 87
<BENEFITS> 1,501
<UNDERWRITING-AMORTIZATION> 310
<UNDERWRITING-OTHER> 343
<INCOME-PRETAX> 480
<INCOME-TAX> 126
<INCOME-CONTINUING> 354
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 354
<EPS-BASIC> 0.91
<EPS-DILUTED> 0.91
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE> 1
Exhibit 99.01
TAP's Form 10-K
December 31, 1998
Page 43
Beginning in January 1997, sixteen purported class actions and one
multi-party suit were commenced in various courts against certain subsidiaries
of the Company, dozens of other insurers and the National Council on
Compensation Insurance ("NCCI"). The allegations in the actions are
substantially similar. The plaintiffs generally allege that the defendants
conspired to collect excessive or improper premiums on certain loss-sensitive
workers' compensation insurance policies in violation of state insurance laws,
antitrust laws, and state unfair trade practices laws. Plaintiffs seek
unspecified monetary damages. Actions have been commenced in the following
jurisdictions: Georgia (El Chico Restaurants, Inc. v. The Aetna Casualty and
Surety Company, et al. and FFE Transportation Services, Inc. et al. v. NCCI, et
al.); Tennessee (El Chico Restaurants, Inc. v. The Aetna Casualty and Surety
Company, et al.); Florida (Bristol Hotel Management Corp., et al. v. The Aetna
Casualty and Surety Company, et al.); New Jersey (Foodarama Supermarkets, Inc.,
et al. v. The Aetna Casualty and Surety Company, et al.); Illinois (Hill-Behan
Lumber Co v. Hartford Insurance Co. et al. and CR/PL Management Co., et al. v.
Allianz Insurance Company Group, et al.); Pennsylvania (Foodarama Supermarkets,
Inc. v. The Aetna Casualty and Surety Company, et al.); Missouri (Hill-Behan
Lumber Corp., et al. v. Hartford Insurance Co., et al.); California (Dal-Tile
Corp., et al. v. NCCI, et al.); Texas (Sandwich Chef of Texas, Inc., et al. v.
Reliance National Insurance Company, et al.); Alabama (Alumax Inc., et al. v.
Allianz Insurance Company, et al.); Michigan (American Association of Retired
Persons, et al. v. National Surety Corp., et al.); Kentucky (Payless Cashways,
Inc., et al. v. National Surety Corp., et al.); New York (Burnham Service Corp.
v. NCCI, et al.); and Arizona (Albany International Corp. v. American National
Fire Insurance Company, et al.). The Company has vigorously defended all of the
above-mentioned cases, and intends to continue doing so.
